The US Securities and Exchange Commission (SEC) has warned investors about the potential risks of investing in binary options and has charged a Cyprus-based company with selling them illegally to US investors.
Binary options are securities in the form of options contracts whose payout depend on whether the underlying asset – for instance a company’s stock – increases or decrease in value. In such an all-or nothing payout structure, investors betting on a stock price increase face two possible outcomes when the contract expires: they either receive a pre-determined amount of money if the value of the asset increased over the fixed period, or no money at all if it decreased.
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The SEC alleges that Banc de Binary has been offering and selling binary options to investors across the US without first registering the securities as required under the federal securities laws. The company has broadly solicited US customers by advertising through YouTube videos, spam e-mails, and other Internet-based advertising. Banc de Binary representatives have communicated with investors directly by phone, e-mail, and instant messenger chats. Banc de Binary also has been acting as a broker when offering and selling these securities, but failed to register with the SEC as a broker as required under US law.
The SEC and the Commodity Futures Trading Commission (CFTC) issued a joint investor alert to warn investors about fraudulent promotional schemes involving binary options and binary options trading platforms. Much of the binary options market operates through Internet-based trading platforms that are not necessarily complying with applicable US regulatory requirements and may be engaging in illegal activity.
Co-Director of the SEC’s Division of Enforcement, Andrew Ceresney, said: "Just because foreign companies’ can more easily communicate with American investors doesn’t mean they should skirt our longstanding laws that protect investors by requiring registration of securities. Banc de Binary contacted US investors through the Internet and YouTube but completely disregarded the US securities laws’ registration requirements. We will aggressively combat such conduct no matter where it originates."
According to the SEC’s complaint against Banc de Binary filed in federal court in Nevada, the company began offering and selling binary options to US investors in 2010. Banc de Binary induced investors to create accounts with the company, deposit money into those accounts, and then purchase binary options whose underlying assets include stock and stock indices.
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By GlobalDataBanc de Binary’s solicitation of US investors has been quite successful and attracted some customers with very modest means. For example, one investor had a monthly income of $300 and a net worth of less than $25,000, and another customer was encouraged to deposit additional funds into his Banc de Binary trading account even after he informed the Banc de Binary representative that he was unemployed with less than $1,000 in his checking account.
The SEC’s complaint seeks disgorgement plus prejudgment interest, financial penalties, and preliminary and permanent injunctions against Banc de Binary among other relief. The CFTC reported a parallel action against Banc de Binary.
